Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

10/09/2012 12:12:25 PM Page 1 of 4

Weekly Overview
Week ending 7 September 2012

End 2011
All Ords Index S&P 500 Shanghai RBA Cash Rate US Treasury Bond (10yr) Spot Gold Price Copper, spot Oil WTI Oil/Gold Ratio USD Index AUDUSD EURUSD USDCNY 4,111 1,258 2,199 4.25% 1.88% 1,563 344 99 6.3% 80.23 1.022 1.294 6.299

7 Sept 2012
4,348 1,437 2,127 3.50% 1.67% 1,735 364 96 5.6% 80.16 1.039 1.281 6.344

Chg (week)
0.2% 2.2% 3.8% 0.0% 6.9% 2.6% 5.3% -0.1% -2.6% -1.3% 0.6% 1.9% -0.1%

Chg (ytd)
5.8% 14.2% -3.3% -17.6% -11.2% 11.0% 5.9% -2.4% -12.1% -0.1% 1.7% -1.0% 0.7%
Weekly reversal from China stimulus Best Stockmarket, worst currency Big Reversal on China Stimulus RBA Holds Big move for the week, still ranging Strong move up by Gold

USD dropping, QE3 coming Shorts not working, USD weakening

On Thursday, Mario Draghi, President of the European Central Bank (ECB) announced the ECB has decided on the modalities for undertaking Outright Monetary Transactions in secondary markets for sovereign Bonds in the euro area. The ECB also held base interest rates steady at 0.75%, while downgrading its Gross Domestic Product (GDP) growth estimate for the euro area to a range between -0.6% and -0.2% for 2012 and between -0.4% and 1.4% for 2013. The announcement sent European markets to plus 2% gains, lifted the US S&P500 2.04% to 1432.12 a four year high, reduced Italian 10 year Bond yields 0.25% to 5.24% and Spanish 10 year yields by 0.39% to 5.96%, the EUR/USD lifted 0.23% to 1.2631 and gold was 0.49% higher at US$1702.30. The fact that the OMT bond buying will be sterilised through the ECB buying distressed bonds and selling other securities means there is no increase in the overall money supply. Thus, they are simply transferring money from the private sector to the public sector, or from productive private sector investment to unproductive government spending. It is unlikely these actions will result in improved economic growth, however it will delay debt defaults Further actions from the US Feds FOMC meeting on Sept 13th and the German constitutional court ruling on Sept 12th on the validity of changes to the European bailout plans and banking structures will give the market direction next week. The Chinese government announced a Y1trillion infrastructure spending stimulus. This is about A$150b. Its about 1/5 the size of the stimulus they did in 2009 which created a fair bit of inflatinn in China. This looks a reasonable size and should stabilise the iron ore market. China signed a currency convertibility pact with Taiwan on Yuan convertibility. Another sign that the USD is on the out in Asia, being replaced by the Chinese currency, slowly but surely. US jobs report on Friday was weaker than expected, giving the Federal Reserve more ammunition to launch into another round of Quantitative Easing. This program is designed to inject cash and remove debt from the banks, incentivising them to push more loans to business and consumers. Unfortunately, the transmission mechanism into the economy isnt working, neigher is QE, its simply making the banks less risky and more profitable. If the Fed really wanted to help get the economy going, they would buy debt from consumers, not banks, which would give consumers extra spending power. The S&P500 has tracked up to four year highs finishing at 1437, not too far away from all-time highs at approximately 1580. The market has traded up on very low volumes on expectations that further stimulatory programs will boost the economy and therefore boost stock prices, or least boost stock prices, the real economy is irrelevant. If your Bond positions look sickly the European Central Bank (ECB) will buy them off you, if your stocks look under stress trust the US FOMC to pump up liquidity, if your Chinese steel mill is under pricing pressure local authorities will fund it with stimulus and building projects. Perhaps thats why volumes are so low in the US stock markets; nobody can work out if they are still trading in a free enterprise system. The "Government enterprise system" is flourishing

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

10/09/2012 12:12:25 PM Page 2 of 4

Economy
Australian 2nd quarter GDP Australias GDP increased by a slightly lower than expected 0.6% in the June 2012 quarter. Economists were forecasting a circa 0.7% number, In a minor positive, the previously released March quarter increment was nudged higher to 1.4% (from 1.3%). While just shy of market expectations, the June quarter national accounts data had a soft underbelly. They were heavily reliant on public sector consumption and spending, segments not expected to figure highly over coming quarters. The kicker provided to private household spending by the carbon trading scheme compensation payments is also likely to have been largely exhausted by the end of the second quarter. Household spending on services was only a little higher in the June quarter after a 2%+ surge in the first three months of 2012 From Markit Economics Spain manufacturing output -2.5% in July year on year US Non farm payrolls were +96k in August, $130k expected UK Industrial output registered best monthly rise since Feb 87, +2.9% Dutch July manufacturing output +1.4% Global Composite PMI down to 51.1 in August from 51.7 in July ECB leaves interest rates unchanged at 0.75%, expected Eurozone Composite PMI falls to 47 from 47.5. Eurozone economy still contracting Russian private sector continues to grow, PMI at 53 vs July 52.6. Economy expanding HSBC China Composite PMI at 49.4 vs July 51.9. Economy stagnating Greek economy has contracted for 12 straight quarters, PMI at 42.1 in August as output, orders and employment down sharply Italian PMI at 10 month low 43.6 vs July 44.3

All Ords Charting

Last week I wrote Resources stocks continue to get belted by the collapsing Iron Ore price while banks are drifting lower. Weve now fallen well off the 4400 resistance level and look to be going lower this week as the bad news about the Australian economy persists. This week: After drifting earlier in the week, we have rallied Friday following Thursdays announcement for the ECB on more bond buying and the Chinese infrastructure stimulus. This is likely to provide a temporary bounce with 4400 still holding as resistance. Still waiting on announcements this week from the Fed on QE3 and the German Constitutional Court on bailouts. The market believes both will be favourable.
4361.1, 4365, 4354.3, 4360.6 MA (XAO.ASX@AUX): 200 4274.564, 35 4319.2817, 10 4346.3483

XAO.ASX@AUX: 10:29:07:

4500

4400

4300

4200

4100

4000

3900

Vol (XAO.ASX@AUX):

0 2000M 1000M 0

RSI (100.000000): 14 55.9682

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September October 2011

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January 2012

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September

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

10/09/2012 12:12:25 PM Page 3 of 4

Weekly Stockwatch
As noted above and in previous newsletters, the Iron Ore price collapsed down to $86/ton. This is below what was viewed as the floor price of $100 due to 30% of world production which has a higher costs base. The below chart (from Atlas Iron) shows the iron ore cost curve. Rio Tinto occupies the large green area at the left side of the curve. The Chinese and Indian producers are to the right.

Here is the Iron Ore price chart, which now has the spot price at $90

Last week I said long term investors should be getting ready to buy Iron Ore stocks like Rio Tinto. On Friday afternoon, the Chinese government announced a Y1trillian infrastructure stimulus package and the shareprices of the Iron Ore miners took off with Rio Tinto up 4.5% on the day. In addition, last week saw Fortescue Metals cancel investment plans that will withdraw 50m tons per annum of supply from the market. These are both signs of a market finding a bottom during a panic. I started buying Iron Ore stocks Friday afternoon.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

10/09/2012 12:12:25 PM Page 4 of 4

Chart of the Week

Despite all the gloom and doom, here are a couple of charts from the RBA showing some resilience within the Australian economy 1) Household savings are up, consumers are rebuilding their balance sheets and paying down debt

2) Credit Growth remains under 5%, again, indicating consumers are paying down debt

3) Still a long way before consumers get debt levels back to historical levels seen in the 1990s.